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The role of regret in the persistence of anomalies in financial markets (In French)

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  • Emmanuel PETIT (GREThA UMR CNRS 5113)

Abstract

In this article, we provide a unified framework which can take into account numerous behavioural anomalies observed in financial markets (disposition effect, under- and overreaction phenomena and so on). Our general theoretical framework uses both cognitive and perceptual theories of emotion. Defining the emotion as a revision process of beliefs and preferences (Livet (2002)), we explain the role of regret in the occurrence and the persistence of many psychological biases recently identified in financial markets (rationalization, conservatism, hindsight and confirmatory biases, etcetera). Specifically, the tendency to sell superior-performing stocks too early (Shefrin and Statman (1985)) is a direct consequence of the investor incapacity of revising a strong false (however protected) belief which appears to sustain crucially his self-confidence. This cognitive resistance towards the emotional process highlights the importance of the individual and social control of the emotions.

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Bibliographic Info

Paper provided by Groupe de Recherche en Economie Théorique et Appliquée in its series Cahiers du GREThA with number 2010-07.

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Date of creation: 2010
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Handle: RePEc:grt:wpegrt:2010-07

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Keywords: Regret; theory of emotions; disposition effect; behavioural finance;

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  1. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February.
  2. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
  3. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2003. "Emotion and financial markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-41.
  4. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, 04.
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  6. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  8. Kent Daniel & Sheridan Titman, 2000. "Market Efficiency in an Irrational World," NBER Working Papers 7489, National Bureau of Economic Research, Inc.
  9. Hanoch, Yaniv, 2002. ""Neither an angel nor an ant": Emotion as an aid to bounded rationality," Journal of Economic Psychology, Elsevier, vol. 23(1), pages 1-25, February.
  10. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
  11. Offerman, Theo, 2002. "Hurting hurts more than helping helps," European Economic Review, Elsevier, vol. 46(8), pages 1423-1437, September.
  12. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  13. Stracca, Livio, 2004. "Behavioral finance and asset prices: Where do we stand?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 373-405, June.
  14. Ferris, Stephen P & Haugen, Robert A & Makhija, Anil K, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect," Journal of Finance, American Finance Association, vol. 43(3), pages 677-97, July.
  15. Harris, Lawrence, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect: Discussion," Journal of Finance, American Finance Association, vol. 43(3), pages 698-99, July.
  16. Messinis, George, 1999. " Habit Formation and the Theory of Addiction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 417-42, September.
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